Tag Archives: Labor Force

High Number of Those Not-In-Labor-Force Suggests Headline Unemployment Rate to Remain High

On Friday the Bureau of Labor Statistics released its Employment Situation report. In the headline establishment survey, the nonfarm payroll gain of 151,000 attracted most of the attention. It was well above the 60,000 consensus estimate and showed strength in the private sector with 159,000 jobs added (government employment fell 8,000). From the household survey we find the unemployment rate held steady at 9.6%. It is this household surgery that I will focus on as the composition of the unemployment rate will be something to keep an eye on going forward and may contribute to the rate remaining elevated.

The household survey consists of those employed, unemployed and those not in the labor force. These three categories add up to the total population however the employment rate is calculated as the unemployed divided by the labor force (employed plus unemployed). As the number not in the labor force increases, as it has during this recession, it serves to reduce the unemployment rate. However, as the economy recovers adding those not in the workforce back to the denominator of the unemployment rate calculation will serve to inflate the rate. Not only do the unemployed have to find jobs but also those currently counted as not in the labor force but that will chose to return when prospects for employment improve.

For example, in January of 2007 the 230 million of survey population was comprised of 146 million employed, 7 million unemployed and 77 million not in the labor force (63%, 3% and 34% respectively). As of October 2010, the 239 million population is comprised of 139 million employed, 15 million unemployed and 85 million not in the labor force (58%, 6% and 35% respectively). See chart below. The bottom line is that those not in the workforce has grown as a percentage of the total; as the number is reduced to the extent that they don’t go straight to employed it will be an upward pressure on the unemployment totals.

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A Perspective on Unemployment

Perspective. Often, things appear at their worse when in the midst of a situation but later looking back somehow things do not seem like they were quite as bad.

The recent recession is most often referred to as the worst recession since the Great Depression or the 1980/1982 double-dip recession. With this in mind I found the chart below quite interesting. Does the current employment situation seem worse because we are in the midst of it but when compared to prior recessions the situation is actually not that unusual? Should, as James Altucher in his WSJ blog says, “Everyone needs to relax about unemployment.”

As can be seen in the chart above in each of the last two recessions it took significantly longer than 14 months (June 2009 – present) for the unemployment rate to drop below its recession end level. With the unemployment rate at 9.5%, the same level as it was in June 2009, it may appear we stand a good chance of soon dropping below this rate and at first glance that the unemployment situation this time may not really be all that bad. I would like to point out a few differences between the current situation and the prior two recessions.

First to consider is the raw unemployment level. At the end of the 1991 recession the unemployment rate was 6.80% and the 2001 recession ended with a rate of 5.55%. Contrast that with the current unemployment rate of 9.51%.

Secondly, the change from the unemployment trough to recession end levels is strikingly different. The 1991, 2001 and 2009 changes are 30%, 45% and 117% respectively.

Finally, consider the role of those not in the labor force. Civilian noninstitutional population consists of those employed, unemployed and those not in the workforce with the unemployment rate calculated as the number of unemployed divided by the sum of those employed and unemployed (the labor force). Since those not in the workforce are not calculated as part of the unemployment rate any increase in this number tends to lower the unemployment rate. It is this phenomenon that is keeping the unemployment rate at, or near, the recession end level.

As can be seen in table below, the decrease of those not in the labor force is more dramatic in this recession and serves to decrease the unemployment rate. The last column is the unemployment rate if there had been no change in the labor force participation rate from the end of the recession.

An informative Wall Street Journal article sums up some of the issues that are causing the decrease in the labor force. Some factors the article sites are the extension of unemployment benefits to 99 weeks, job seekers reluctance to take a lower paying job than their prior job and an increasingly immobile population due to the collapse in real estate prices.

The net outcome will be stubbornly high unemployment rates as job creation will not only need to keep up with population growth but also to keep pace with job seekers who at some point will need to reenter the labor force.

In my mind, and in contract to what James Altucher says, the employment situation should be at the top of the list of economic concerns with the current situation providing a deflationary headwind to economic growth. Invest accordingly and “Row, Not Sail.